We have a loan portfolio for performing and re-performing loans, including loans secured by first position liens on 1-4 dwelling units. When we utilize loan workout options for these loans (such as loan modification, short sale, and deed-in-lieu), are we required to send an appraisal notice and copies of appraisals under the Equal Credit Opportunity Act (ECOA) and Regulation B?

The answer depends on the type of workout option, but we think that certain loan modifications are subject to Regulation B — while a short sale and deed-in-lieu are not. Regulation B’s appraisal notice requirements apply whenever you receive an application for an extension of credit secured by a first lien on a dwelling. Therefore, you must determine whether each workout involves an “application” for an “extension of credit.”

An “application” is a written or oral request for an “extension of credit” made in accordance with your bank’s procedures. An “extension of credit” means the granting of credit in any form, including (but not limited to) credit added to existing credit; credit granted as part of an open-end credit plan; refinancing or renewal; loan consolidation; and the continuance of existing credit without any special effort to collect at or after maturity.

The Federal Reserve Board has noted that a loan modification can involve an “extension of credit” within the meaning of Regulation B if the lender extends the right to defer payment of a debt by capitalizing accrued interest and certain escrow advances, reducing the interest rate, extending the loan term, or providing for principal forbearance.

A deed-in-lieu of foreclosure is a transaction in which the borrower conveys all interest in a real property to the lender to satisfy a loan that is in default and avoid foreclosure. In our view, a lender is not extending credit within the meaning of Regulation B when it exercises this type of workout option, and Regulation B’s appraisal notice requirement would not apply.

A short sale occurs when a borrower sells their home for less than the total debt remaining on the mortgage, and the lender agrees to accept the proceeds from the sale in exchange for releasing the lien on the property. As with a deed-in-lieu of foreclosure, we do not think a short sale constitutes an extension of credit within the meaning of Regulation B, and the regulation’s appraisal notice requirement would not apply.

For resources related to our guidance, please see:

ECOA Regulation B, 12 CFR 1002.14(a)(1) (“A creditor shall provide an applicant a copy of all appraisals and other written valuations developed in connection with an application for credit that is to be secured by a first lien on a dwelling.”)

ECOA Regulation B, 12 CFR 1002.14(a)(2) (“For applications subject to paragraph (a)(1) of this section, a creditor shall mail or deliver to an applicant, not later than the third business day after the creditor receives an application for credit that is to be secured by a first lien on a dwelling, a notice in writing of the applicant's right to receive a copy of all written appraisals developed in connection with the application.”)

ECOA Regulation B, 12 CFR 1002.2(f) (“Application means an oral or written request for an extension of credit that is made in accordance with procedures used by a creditor for the type of credit requested.”)

ECOA Regulation B, 12 CFR 1002.2(q) (“[E]xtension of credit means the granting of credit in any form (including, but not limited to, credit granted in addition to any existing credit or credit limit; credit granted pursuant to an open-end credit plan; the refinancing or other renewal of credit, including the issuance of a new credit card in place of an expiring credit card or in substitution for an existing credit card; the consolidation of two or more obligations; or the continuance of existing credit without any special effort to collect at or after maturity).”)

Equal Credit Opportunity Act (ECOA) Valuations Rule, Small Entity Compliance Guide, pg. 10 (“Loss-mitigation transactions, such as loan modifications, short sales, and deed-in-lieu transactions, are subject to 1002.14(a)(1) if they are credit transactions covered by Regulation B.”)

Official Interpretations, 12 CFR 1002, Paragraph 2(f), Comment 1 (“A creditor has the latitude under the regulation to establish its own application process and to decide the type and amount of information it will require from credit applicants.”)

78 Federal Register 7215 (January 31, 2013) (In the context of interpreting the requirement of Regulation B that there be a notice of an adverse action on an application, for example, the Federal Reserve Board noted in a Consumer Affairs Letter that loan modifications can involve an “application” for an “extension of credit” within the meaning of Regulation B.)

Federal Reserve Board, Consumer Affairs Letter CA 09-13, Mortgage Loan Modification and Regulation B’s Adverse Action Requirement (Dec. 4, 2009) (“Under Regulation B, ‘credit’ includes ‘the right granted by a creditor to an applicant to defer payment of a debt.’ An ‘extension of credit’ is defined as ‘the granting of credit in any form (including, but not limited to, credit granted in addition to any existing credit…[,] the refinancing or other renewal of credit…or the continuance of existing credit without any special effort to collect at or after maturity).’ For example, we understand that under a HAMP trial period plan or modification, the servicer extends the right to defer payment of a debt by capitalizing accrued interest and certain escrow advances, reducing the interest rate, extending the loan term, and/or providing for principal forbearance. Based on this understanding, the action(s) taken by a servicer under a HAMP trial period plan or modification would constitute an “extension of credit” for purposes of the HAMP.”)